Inflation Pressures Ease, But Rate Cut Unlikely
A recent report from the Bureau of Labor Statistics has revealed that wholesale prices increased less than expected in December, indicating a slowdown in pipeline inflation pressures. However, this development is unlikely to prompt another Federal Reserve interest rate cut in the near future.
Producer Price Index Rises Modestly
The producer price index (PPI) rose by a mere 0.2% in December, falling short of the 0.4% increase predicted by analysts. This marks a significant decrease from the 0.4% rise seen in November. When excluding food and energy, the core PPI remained flat, contrary to expectations of a 0.3% increase.
Annual Inflation Rate Remains Elevated
Despite the modest monthly increase, the annual headline PPI rose by 3.3% for the full year, significantly higher than the 1.1% increase seen in 2023. Goods prices were driven up by a 9.7% surge in gasoline prices, while services prices remained flat.
Market Reaction and Interest Rate Expectations
Following the report, stock market futures surged, while Treasury yields declined. The release is the first of two key inflation readings this week, which will likely influence the Federal Reserve’s interest rate decision later in January. Markets are currently pricing in no rate cuts for the remainder of the year, with Fed funds futures implying only one rate cut.
Federal Reserve’s Next Move
While the central bank focuses on the personal consumption expenditures price index as its primary inflation gauge, the PPI and CPI readings will still play a role in its decision-making process. Policymakers, including Chair Jerome Powell, may use the upcoming meeting to set the stage for future rate decisions. However, with inflation pressures easing, a rate cut appears unlikely in the near term.
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